Tata Sons wins case against Income Tax Department's attempt to reopen assessment, court quashes reassessment notice.

Case Name:

Tata Sons Limited vs. Dy. Commissioner of Income Tax, Range 2(3), Mumbai and Others (High Court of Bombay)

Key Takeaways:

• The court held that the Income Tax Department cannot reopen an assessment based on a mere change of opinion.
• The reasons provided by the department for reopening the assessment were found to be incorrect and based on a misunderstanding of the facts.
• The court emphasized the importance of the approving authority under Section 151 of the Income Tax Act to properly consider the reasons for reopening before granting approval.
• The case reinforces the principle that reassessment cannot be allowed in situations where there is a change of opinion and the absence of fresh tangible material.

Issue:

Whether the Income Tax Department had valid reasons to reopen Tata Sons' assessment for the assessment year 2005-06 under Section 147 of the Income Tax Act.

Facts:

- Tata Sons had filed its return of income for the assessment year 2005-06, declaring a total income of Rs. 880.66 crores.

- The return was processed, and an assessment order was passed under Section 143(3) of the Income Tax Act on 31st December 2007, assessing the income at Rs. 1160.67 crores.

- A rectification order was passed under Section 154 on 6th May 2009, assessing the income at Rs. 2541.34 crores under Section 115JB

- On 31st March 2010, Tata Sons received a notice under Section 148 from the Income Tax Department, alleging that its income chargeable to tax for the assessment year 2005-06 had escaped assessment.

- The reasons recorded for reopening the assessment were provided to Tata Sons on 18th May 2010.

Arguments

- Tata Sons argued that the notice for reopening the assessment was dispatched by the Income Tax Department more than four years after the relevant assessment year and should be considered as reopened after the four-year period, making it invalid.

- The Income Tax Department's primary argument was that the sale of shares of Tata Consultancy Services (TCS) by Tata Sons should be treated as business income and not profits arising from the sale of investments. Therefore, the department believed that a sum of Rs. 22,71,25,79,374/- had escaped assessment.

Key Legal Precedents:

- The court cited the case of Commissioner of Income Tax v. Kelvinator of India Limited (2010) 320 ITR 561 (SC), which laid down the principles for reopening assessments within four years of the end of the relevant assessment year.

- The court also referred to the case of Jainam Investments vs. Assistant Commissioner, where it had previously laid down the settled principles for reopening assessments within four years.

Judgement:

The Bombay High Court allowed Tata Sons' petition and quashed the notice dated 31st March 2010 issued by the Income Tax Department under Section 148 to reopen the assessment for the assessment year 2005-06. The court also set aside the order dated 29th October 2010, which had rejected Tata Sons' objections to the issuance of the notice under Section 148.

The court held that the reasons provided by the Income Tax Department for reopening the assessment were based on incorrect facts and conclusions. The department had incorrectly stated that a sum of Rs. 22,71,25,79,374/- had escaped assessment, when the only item that could have been stated as escaped assessment was the long-term capital gains from the sale of TCS shares, amounting to Rs. 19,32,34,27,592/-.

The court observed that if the reasons for reopening the assessment are based on incorrect facts or conclusions, the notice issued for reopening cannot be sustained. Additionally, the court noted that the Income Tax Department was attempting to reopen the assessment based on a change of opinion, which is not a valid ground for reopening.

The court criticized the approving authority under Section 151 of the Income Tax Act for not properly considering the reasons for reopening before granting approval.

FAQs-

Q1: What is the significance of this case?

A1: This case reinforces the principle that the Income Tax Department cannot reopen an assessment based solely on a change of opinion. It also highlights the importance of the approving authority under Section 151 of the Income Tax Act to properly scrutinize the reasons for reopening before granting approval.

Q2: What were the key legal precedents cited in this case?

A2: The court cited the case of Commissioner of Income Tax v. Kelvinator of India Limited (2010) 320 ITR 561 (SC) and its own previous decision in

Jainam Investments vs. Assistant Commissioner, which laid down the principles for reopening assessments within four years of the end of the relevant assessment year.

Q3: What was the court's reasoning for quashing the reassessment notice?

A3: The court quashed the reassessment notice because the reasons provided by the Income Tax Department for reopening the assessment were based on incorrect facts and conclusions. Additionally, the department was attempting to reopen the assessment based on a change of opinion, which is not a valid ground for reassessment.

Q4: What does this case mean for the parties involved

A4: For Tata Sons, this case means that the Income Tax Department cannot proceed with the reassessment for the assessment year 2005-06, and the original assessment order will stand. For the Income Tax Department, this case serves as a reminder to ensure that the reasons for reopening an assessment are based on correct facts and not merely a change of opinion.

Q5: What is the broader impact of this case?

A5: This case reinforces the legal principles governing the reopening of assessments by the Income Tax Department. It emphasizes the need for the department to have valid reasons based on tangible material and not merely a change of opinion. This case will likely be cited as a precedent in future cases involving the reopening of assessments.

1. Petitioner had filed its return of income on 31st October, 2005 for A.Y.2005-06 declaring total income of Rs. 880.66 Crores (incorrectly recorded in the reasons as Rs. 808.66 Crores). The return was processed under section 143(1) of the Income Tax Act, 1961 (the said Act) on 27th March, 2006. Subsequently, the case was selected for scrutiny and an order dated 31st December, 2007 under section 143(3) of the Act was passed assessing the income at Rs 1160.67 Crores. A rectification order was passed under section 154 of the Act on 6th May, 2009 assessing the income at Rs. 2541.34 Crores under section 115JB of the Act, as tax liability was higher. Subsequently, the assessment was reopened and an order under section 143(3) read with 147 was passed on 18th December, 2009.

2. Thereafter, Petitioner received a notice dated 31st March, 2010 under section 148 of the said Act from Respondent No. 1 alleging that he had reason to believe that Petitioner’s income chargeable to tax for A.Y. 2005-2006 has escaped assessment within the meaning of section 147 of the Act. Petitioner was later provided a copy of reasons recorded for reopening assessment on 18th May, 2010. Petitioner has attacked the notice for re-opening the assessment on various grounds including that it was dispatched by Respondent more than four years after the relevant assessment year and therefore even if the notice is dated within four years of relevant assessment order, the Court should consider it to have been reopened after four years.

3. Mr. Pardiwalla submitted that in any event Petitioner has a cast iron case and the Court will hold on merits in favour of the Petitioner, after considering the reasons recorded for re-opening.

4. We have heard Mr. Pardiwalla, for Petitioner and Mr. Arvind Pinto, for Respondents and having considered the reasons for re-opening with their assistance, we are inclined to hold in favour of Petitioner and set aside the notice dated 31st March, 2010 under sec.148 of the Act impugned in this Petition. Consequently the order rejecting the objections of the Petitioner dated 29th October, 2010 which is also impugned in the Petition also will have to be set aside.

5. The entire basis of forming an opinion that there has been an escapement of assessment is that, the sale of shares of TCS Division by Petitioner was nothing but ‘business income’ and therefore the profits arising out of the sale of shares held by Petitioner in the group companies would be treated as Petitioner’s income from business, and not profits arising out of sale of investment.

Therefore, according to Respdt. No. 1 he had reason to believe that a sum of Rs.22,71,25,79,374/- has escaped assessment. Break up for this figure of Rs.22,71,25,79,374/- can be found in reasons itself and it is necessary for us to re-produce the same. The same is as under:

6. If we consider the table reproduced above, the sale of shares of TCS Ltd. which according to Respondent No. 1 should be treated as ‘business income’ and not ‘profits arising out of sale of sale of investment’, is only Rs. 19,32,34,27,592/- (12,26,61,28,794 + 7,05,72,98,798) i.e.“Long terms capital gains:- Tata Consultancy Services Limited”. Mr. Pinto though he made valiant attempt to defend the notice issued for re-opening, in fairness, as an officer of the Court, considering the reasons as recorded agreed that the only item which could have been stated to have escaped assessment would be the Long Term Capital gains in the sale of TCS Ltd. shares amounting to Rs. 19,32,34,27,592/- and Respondent No. 1 was incorrect in stating that he had reason to believe that the sum of Rs. 22,71,25,79,374/- has escaped assessment.

7. In our view, if the reasons for re-opening the assessment is based on incorrect facts or conclusions, certainly the notice issued for re-opening cannot be sustained. Moreover, if according to Respondent No. 1 only the sale of shares of TCS was ‘business income’ and not ‘profits arising of sale of investment’ to say that the amount of Rs.22,71,25,79,374/- has escaped assessment, also indicates non- application of mind. We would also go a step ahead and observe that if only the approving authority under section 151 of the Act had considered the reasons properly, either he would have directed Respondent No. 1 to re-work on the reasons or would not have granted the approval. Moreover, we may keep in mind this is a case where the scrutiny assessment was completed and order under section 143(3) of the Act has been passed followed by a rectification order under section 154 of the Act. Therefore Petitioner’s case has been considered at two stages, (i) When the assessment order was passed after scrutiny under section 143(3) of the Act and (ii) When an order under section 154 of the Act was passed.

8. The reasons for proposed re-opening clearly indicates that Respondent No. 1 wants to re-open only on the basis of change of opinion which, as held time and again by various Courts, can not be a ground for reopening. This is because in the assessment order dated 31st December, 2007 passed under section 143(3), the same point raised in the reasons for re-opening has been discussed and considered. The relevant portion reads as under:

“As per the submissions, the activity of the assessee company for making investment in shares group company was to acquire and retain control of the companies promoted by it. The question that requires to be considered is whether this activity itself constitute a business when the real intention of the company is not to earn profit but to acquire and exercise control of the group companies. In order to constitute activity of the assessee for carrying on the business, it is essential that such activity for carrying on the business, it is essential that such activity must be with a motive of earning profit. Such earning of profit should be by the company itself and not by the other group company. This issue came to be considered by the Hon’ble Madras High Court in the case CIT vs. K.S. Venkatasubbiah Reddiar (1996) 221 ITR 181 where it was held that the income tax Act defines the term “business” only inclusively. The two essential requirements for an activity to be considered as “business” are (i) it must be continuous course of activity and (ii) it must be carried on with a profit motive. The issue also came to be considered by the Delhi High Court in the case in Bharat Development Pvt. Ltd. vs. CIT (1982) 133 ITR 4702 where it was observed that the expression “business” is a word of a occupation. In taxing statute, it is used in the sense of a occupation or profession which occupies the time, of making profit. To regard an activity as business there must be a course dealings either actually continued or contemplating to be continued with the profit motive, and not for support or pleasure. Whether a person carried on business in a particular commodity must depend upon the volume, frequency, continuity and transaction of purchase and sale in class of goods and the transaction must ordinarily be entered into with a profit motive. Now when the ratio of the aforesaid decisions is to be applied to the facts of the present case, the actions of the assessee are not actuated by the profit motive. Transactions of purchasing shares to garner controlling interest could not be regarded as carrying on business for the purpose of section 28 of the Income Tax Act .”

9. It is settled law that review in the garb of reassessment is absolutely prohibited and the Courts have consistently held that reassessment cannot be allowed in such situation of change of opinion and presence of fresh tangible material is a sine qua non for a valid re-assessment. Where the assessment is sought to be reopened within a period of 4 years, of end of relevant assessment year, this Court in Jainam Investments vs. Assistant Commissioner has laid down the settled principles which read as under:

12..Where the assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the Apex Court in Commissioner of Income Tax V/s. Kelvinator of India Limited2 has laid down the test of the principle which reads as under :

"Therefore, post 1st April, 1989, power to reopen is much wider.

However, one needs to give a schematic interpretation to the words "reason to believe" falling which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an inbuilt test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to s. 147 of the act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in s.147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the AO".

10. In the circumstances, we allow the Petition in terms of prayer clause (a), which reads as under:

(a) For a writ of certiorari or a writ, direction or order in the nature of certiorari or any other appropriate writ, direction or order under Article 226 of the Constitution of India calling for the records of the case pertaining to the impugned notice dated 31.03.2010 issued by the Respondent No. 1 under section 148 of the Act to reopen the assessment for the assessment year 2005-06 and the order dated 29.10.2010 rejecting the objections of the Petitioner to the issuance of the notice under section 148 of the Act and after considering the legality thereof quashing and setting aside the same.

11. Petition disposed accordingly with no order as to costs.

(N. J. JAMADAR, J.) (K. R. SHRIRAM, J.)